“It melts like ice” – Why the future of Argentina peso (ARS) is brisk
- The Argentinian peso crash has accelerated despite the sharp rate hike.
- There is no easy solution to save the currency in the near and longer term.
- A likely solution would be to form a union with Brazil.
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Argentina peso (ARS/USD) is in trouble and the situation could get worse. When I wrote about the currency in May, the dollar exchange rate was 230. Now it stands at 243 and the black market rate is much worse. The currency was trading at 124 in the same period last year, signaling that the currency has now become worthless.
No easy solution to save ARS
Copy link to sectionIt seems like Argentina did not learn from Zimbabwe, a country that printed a worthless trillion-dollar note. In the past few years, the country’s government has embraced cash printing to support the giant budget deficit.
Printing money is the worst policy that a country can implement since it leads to high inflation. In the United States, the recent quantitative easing (QE) program played a role in pushing inflation to a four-decade high.
Argentina’s central bank has tried to rescue the peso. In May, the central bank hiked interest rates to 97% as inflation soared to a multi-decade high of 100%. A rate hike is meant to increase the attractiveness to a local currency.
The challenge for Argentina is that the rate hikes are coming at a time when confidence among investors and residents is falling. As a result, most people in the commodity-rich country have moved to the safety of the US dollar.
It is difficult to see how the Argentina peso comes back to life since confidence among investors and locals has plunged. Therefore, I believe that the country will now take the riskier route of embracing foreign currencies like China’s renminbi, the US dollar, or the Brazilian real.
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Argentina could ditch the peso
Copy link to sectionArgentina has already activated a payment mechanism with China that allows it to pay its imports in Chinese currency. Further, talks of creating a common currency with Brazil have existed for many years. I believe that this could be a solution for now since the two countries are neighbours. The risk is that agreeing to such an arrangement will dent its sovereignty to some extent since Argentina will come from a point of weakness.
Argentina could consider swapping its currency for the US dollar. In fact, the current front-runner in the upcoming election has suggested that he will activate the dollar and then blow up the central bank. He recently lamented that the peso melts like ice in the Sahara Desert.
There are significant risks to this. The most important one is that the country needs to first buy billions of dollars, with money it does not have. Most importantly, moving to the USD means that the country will need to cede its independence by relying on actions by the Federal Reserve.
The bottom line is that the Argentinian peso is plunging and there is no good solution ahead. Moving to the dollar, as Argentina did in 1991, had a messy divorce in 2002, leading to a 75% plunge.
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